Why the rupee is on a freefall

The price of both oil and gold has been going up for a while (though very recently it has been falling). This means more and more dollars have to be paid for importing them.

This, as explained above, leads to a glut of rupees and an increased demand for the dollars, thus pushing down the value of the rupee against the dollar.

On April 1, 2011, one dollar was worth Rs 44.44. Between then and March 31, 2012, India ran a trade deficit of $185billion. And it has continued that in the month of April 2012 as well. This has led to one dollar being currently worth Rs 54.7.

Why the rupee is on a freefall

An increase in price typically leads to a fall in demand. If the increased price of oil had been passed onto the end consumer, the demand for oil would have come down.

This would have meant that a fewer number of dollars would have been required to pay for the oil being imported, in turn leading to a lower trade deficit and hence lesser pressure on the rupee-dollar rate.

Why the rupee is on a freefall

It will also push down the fiscal deficit, given that the subsidy burden of the government will be eliminated or come down. On the flip side an increase in the price of oil products will lead to increased inflation, at least in the short term.

In the end the only way to stem the fall of the rupee against the dollar is to eliminate and if not that, at least bring down, oil subsidy.

Will that happen? Will the allies of the Congress led United Progressive Alliance government allow that to happen?